Gage Corporation has two operating divisions in a semiautonomous organizational
ID: 2542384 • Letter: G
Question
Gage Corporation has two operating divisions in a semiautonomous organizational structure. Adams Division, located in the United States, produces a specialized electrical component that is an input to Bute Division, located in the south of England. Adams uses idle capacity to produce the component, which has a domestic market price of $12. Its variable costs are $5 per unit. Gage’s U.S. tax rate is 30 percent of income.
In addition to the transfer price for each component received from Adams, Bute pays a $4 per unit shipping fee. The component becomes a part of its assembled product, which costs an additional $1 to produce and sells for an equivalent of $23. Bute could purchase the component from a Manchester (England) supplier for $10 per unit. Gage’s English tax rate is 70 percent of income. Assume that English tax laws permit transferring at either variable cost or market price.
Required:
a-1. What are the respective profits after tax for both the Adams Division and Bute Division of Gage if the transfer price is $5. (Round your answers to 2 decimal places.)
a-2. What are the respective profits after tax for both the Adams Division and Bute Division of Gage if the transfer price is $12. (Round your answers to 2 decimal places.)
a-3. What transfer price is economically optimal for Gage Corporation?
The transfer price economically optimal for Gage Corporation is $5 per unit. The transfer price economically optimal for Gage Corporation is $12 per unit.Explanation / Answer
3. $12 per Unit will be economically optimal for Gage Corporation as in that Case the company's overall profit is $6.7 Per Unit
1. If Transfer Price is RS. 5, Net Income Adam Division Bute Division Sale Price 5 23 Variable Cost 5 10 Profit 0 13 Tax 0 9.1 Net Income 0 3.9 Combined Profit for Company =3.9 P.URelated Questions
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